Encrypted messenger company Telegram’s fight with the U.S. Securities Exchange Commission is heating up.
The legal battle began last month when the SEC won a restraining order against the company’s $1.7 billion USD “Gram” token offering after arguing in the the U.S. District Court for the Southern District of New York (SDNY) that the token sale was an unregistered security offering accessible to American investors.
“We disagree with the SEC’s legal position and intend to vigorously defend the lawsuit,” Telegram said at the time.
Now, Telegram has indeed followed through on that unambiguous commitment, having filed a November 12th response to the district court wherein the company totally contested the Commission’s assertion that the Gram is an unregistered security offering:
“To the contrary, Plaintiff’s claims are without merit as Telegram’s private placement to highly sophisticated, accredited investors was conducted pursuant to valid exemptions to registration under the federal securities laws and Grams will not be securities when they are created at the time of launch of the TON [Telegram Open Network] Blockchain.”
On that last point, Telegram specifically argued that when Gram tokens are finally actualized “they will constitute a currency and/or commodity.” The SEC has shown nuanced in such matters before, like in the EOS wrist slap case, but it’s clear from the Commission’s actions so far that the U.S. securities watchdog views the Gram token as a bold-faced unregistered security.
Nevertheless, is digging in just the same and hoping that it can persuade the court that the SEC’s jurisdiction should not apply in this case.
“Telegram respectfully requests that the Court … dismiss Plaintiffs’ claims against Telegram in their entirety and with prejudice; and … grant such other and further relief as it may deem just and proper,” the company said in its Tuesday filing.
The Most Interesting Developments Are Yet to Come
Back in the summer when the SEC similarly came after Kik, the creators of the kin token, some analysts in the cryptocurrency ecosystem thought it might become a hallmark case in the U.S. crypto arena.
As time has gone on, that possibility has seemed less likely as Kik has seemingly squandered any chance of flexibility in the proceedings with a scorched earth defensive style.
Of course, Telegram is being defiant agains the SEC in its own proceedings, but there’s a key difference between the Kik and Telegram cases: Kik’s token was already launched when the Commission moved in, whereas Telegram’s Gram token is yet to be created and won’t be for some time longer.
That wrinkle alone could lead to Telegram’s proceedings being even more consequential than Kik’s, some have conjectured. Though it remains to be seen what will happen in either case.
Overall, this is a much better "test case" than Kik (in part because GRAMs are not in the wild yet) and we might get some very interesting judge-made law pursuant to this case. Definitely worth keeping an eye on.
— _gabrielShapir0 (@lex_node) November 13, 2019
Kik’s Struggle with SEC Gets Tougher
In October, Kik argued before the SDNY district court that it could not have offered an unregistered security because the current standing legal definition of “investment contract” in the U.S. was too vague.
In kind, the Commission lambasted that assertion last month, saying:
“This defense asserts that, notwithstanding 70-plus years of well-settled jurisprudence, the term ‘investment contract’ in the securities laws is void for vagueness as applied to Kik’s investment scheme. This claim is untenable and should be dismissed.”
The court agreed with that SEC position this week, as Judge Alvin K. Hellerstein ruled that Kik’s “vagueness” argument was indeed untenable.
“If the law is vague, or confusing, or arbitrary, as defendant argues, that can be argued objectively,” Hellerstein wrote.
Alas, if that defense was Kik’s best shot it just landed as a dud far from its mark, but regardless the case is not over yet and Kik is still resisting for now.